Pakistan cbank unveils 5 year plan to boost islamic finance

﻿Feb 25 Pakistan's central bank has published a detailed five-year plan to promote Islamic finance through an array of proposed legislative changes, product incentives and instructions to market participants. The plan aims to double the branch network of Islamic banks, which now have about 1,200 branches, and increase the industry's market share to 15 percent of the banking system by 2018 from roughly 10 percent now. The document says it would create a level playing field for Islamic banks in the world's second most populous Muslim nation; their financing-to-deposit ratio would reach a level that was at least on a par with their conventional peers. The central bank said the plan would focus on improving the public's perception of the industry, and it included a detailed timetable for the gradual roll-out of initiatives."Despite strong growth momentum, the industry perception is still not very positive, largely due to limited awareness and similarities between conventional and Islamic banking products," said Saleem Ullah, director of the central bank's Islamic banking department. The regulator aims to encourage Islamic banks to not only obey industry rules but also follow the spirit of Islamic principles, such as an emphasis on transactions based on real economic activity rather than monetary speculation."Product offerings are overwhelmingly debt-based, which though they meet the minimum sharia requirements don't meet the sharia objectives of risk- and reward-sharing, and equitable and broad-based distribution of economic gains," Ullah said. As of September, Pakistan had five full-fledged Islamic banks and 14 others offering Islamic banking products; they held a combined 926 billion rupees ($8.8 billion) of assets or 9.5 percent of the total, central bank data showed. That compares with around 25 percent in the Gulf Arab region. LEGAL FRAMEWORK

The central bank intends to develop a distinct legal framework for Pakistan's Islamic banks by 2018, and to propose changes to its own charter and review other legislation to eliminate any confusion and inconsistencies. It will work with federal and state governments to provide tax neutrality for Islamic banks to limit extra product costs. The regulator will also step up adoption of guidelines from the Malaysia-based Islamic Financial Services Board and the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, the global industry's two main standard-setting bodies. A sharia governance framework is scheduled to be released in Pakistan this year which will specify roles and responsibilities of management, scholars approving Islamic finance activities, and sharia compliance and audit officers.

Guidelines for development finance institutions to start offering Islamic banking are to be issued by 2015. An alternate resolution mechanism for resolving Islamic banking disputes is planned for 2016. An Islamic pricing benchmark for money market transactions and short-term lending would be devised by 2015, as well as guidelines for treasury products. By 2016, the central bank is to have rationalised minimum capital requirements for full-fledged banks, Islamic windows and Islamic banking subsidiaries of conventional banks. This would be complemented by a media campaign to promote the industry which was launched last year and is to be strengthened. COMPLEX The central bank's complex plan would be challenging to implement for any regulator, even in more developed economies than Pakistan. Success in all of the initiatives is not entirely under the central bank's control; it will need the cooperation of other institutions such as parliament and the finance ministry, which may be distracted by other issues.